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How to Invest in Stocks

February 3, 2017
Brokers, Investing, Investments
How to invest in stocks

Investing in stocks is an excellent way to grow wealth. But how do you actually start? Follow these steps to learn how to invest in the stock market.

How to invest in stocks in 4 steps

  1. Select your investing style. You can go the DIY route or automate with a robo-advisor.
  2. Choose between stock and stock mutual funds. You may also choose both.
  3. Set a budget. It’s OK to start small.
  4. Open an account. Most accounts take only a few minutes to open.

Continue below for more on each of these steps.

1. Select your investing style

There are several ways to approach stock investing. Choose the option below that best represents your situation.

  • “I’m the DIY type and am interested in choosing stocks and stock funds for myself.” Keep reading; the steps below are for you. Or, if you already know the stock-buying game and just need a brokerage, see our round-up of the best online stock brokers.
  • “I know stocks can be a great investment, but I’d like someone to manage the process for me.” Check out our top picks for robo-advisors, which offer low-cost investment management. They’ll invest your money for you based on your specific goals.

2. Choose between stocks and stock mutual funds

For most people, stock market investing means choosing among these two investment types:

  • Stock (also called equity) mutual funds or exchange-traded funds. These mutual funds let you purchase small pieces of many different stocks in a single transaction. Index funds and ETFs track an index; for example, a Standard & Poor’s 500 fund replicates that index by buying the stock of the companies in it. When you invest in a fund, you also own small pieces of those companies. You can put several funds together to build a diversified portfolio.
  • Individual stocks. If you’re after a specific company, you can buy a single share or a few shares as a way to dip your toe into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment.

The upside of stock mutual funds is that they are inherently diversified, which lessens your risk. But they’re unlikely to rise in meteoric fashion as some individual stocks might. The upside of individual stocks is that a wise pick can pay off handsomely, but the odds that any individual stock will make you rich are exceedingly slim.

For the vast majority of investors — particularly those who are investing their retirement savings — building a portfolio composed primarily of mutual funds is the clear choice.

» Still unsure which is right for you? See stocks vs. mutual funds

3. Set a budget

New investors often have two questions in this step of the process:

  1. How much money do I need to start investing in stocks? The amount of money you need to buy an individual stock depends on how expensive the shares are. (Share prices range from just a few dollars to six figures.) If you want mutual funds and have a small budget, an exchange-traded fund (ETF) may be your best bet. Mutual funds have minimums of $1,000 or more, but ETFs trade like a stock, which means you purchase them for a share price (potentially $10 or less on the low end).
  2. How much money should I invest in stocks? If you’re investing through funds — have we mentioned this is our preference? — you can allocate a fairly large portion of your portfolio toward stock funds, especially if you have a long time horizon. A 30-year-old investing for retirement might have 80% of his or her portfolio in stock funds; the rest would be in bond funds. Individual stocks are another story. We’d recommend keeping these to 10% or less of your investment portfolio.

» Got a small amount of cash to put to work? Here’s how to invest $500

4. Open an account

If you’re participating in a workplace retirement plan such as a 401(k), you may already be invested in stocks, likely through mutual funds.

If you don’t have a 401(k) or you find its investment choices lacking, you can use an online broker to buy stocks, funds and a variety of other investments. With a broker, you can open an individual retirement account, also known as an IRA — here are our top picks for IRA accounts — or you can open a taxable brokerage account if you’re already saving adequately for retirement.

We have a step-by-step guide to opening a brokerage account if you need a deep dive. You’ll want to evaluate brokers based on factors like costs (trading commissions, account fees), investment selection (look for a good selection of commission-free ETFs if you favor funds) and investor research and tools.

Below are three strong options from our analysis of the best one stock brokers: Ally Invest (a winner in the low cost category), Merrill Edge (a top pick in the research category) and E-Trade (a winner for investment selection):

NerdWallet rating

Fees

$4.95

per trade

Account minimum

$0

Promotion

$50-$3,500

in cash bonus with a qualifying deposit

The bottom line

Ally Invest’s robust trading platform and lineup of free research, charting, data and analytical tools make it a good choice for active traders. But it’s also appropriate for beginning investors who will appreciate that there is no account minimum and no annual fees.

Show pros & cons

Pros

  • Low commissions.

  • No account minimum.

  • Strong web-based platform.

  • Robust research and tools.

Cons

  • No commission-free ETFs.

  • No no-transaction-fee mutual funds.

Read full review
NerdWallet rating

Fees

$6.95

per trade

Account minimum

$0

Promotion

$100-$600

in cash bonus with a qualifying deposit

The bottom line

Merrill Edge offers high-quality customer service, robust research and low fees. Customers of parent company Bank of America will love the seamless, thoughtful integration, with a single login to access both accounts.

Show pros & cons

Pros

  • Robust third-party research.

  • Ongoing promotions.

  • Integrated with Bank of America.

  • Free trades for eligible Bank of America customers.

Cons

  • No commission-free ETFs.

  • Minimum balance requirement for active trading platform.

Read full review
NerdWallet rating

Fees

$6.95

per trade

Account minimum

$500

Promotion

60

days of commission-free trades with a qualifying deposit

The bottom line

E-Trade has long been one of the most popular online brokers, largely because of its easy-to-use tools. They offer a tiered commission structure that favors frequent traders but can add up to high costs for casual investors.

Show pros & cons

Pros

  • Easy-to-use tools.

  • Large investment selection.

  • Excellent customer support.

  • Access to extensive research.

  • Advanced mobile app.

  • Reduced commissions for frequent traders.

Cons

  • Higher commissions for low-volume traders.

  • Minimum balance requirement for active trading platform.

Read full review

Want more context?

If you’re tempted to open a brokerage account but need more advice on choosing the right one, see our 2018 round-up of the best brokers for beginner stock investors. It compares today’s top online brokerages across all the metrics that matter most to investors just starting out: fees, minimum balances to open and investor tools and resources.

Read: Best online stock brokers for beginners »